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Niall Ferguson on the economic crisis

January 29th, 2010 Posted in Uncategorized by

“Though superficially this crisis seems like a defeat for Smith, Hayek, and Friedman, and a victory for Marx, Keynes, and Polanyi, that might well turn out to be wrong. Far from having been caused by unregulated free markets, this crisis may have been caused by distortions of the market from ill-advised government actions: explicit and implicit guarantees to supersized banks, inappropriate empowerment of rating agencies, disastrously loose monetary policy, bad regulation of big insurers, systematic encouragement of reckless mortgage lending — not to mention distortions of currency markets by central bank intervention.”

- Niall Ferguson,  “Dead Men Walking“, Foreign Policy. 

10 Responses to “Niall Ferguson on the economic crisis”

  1. Niklas Smith Says:

    A good book that makes that argument (though also castigates the poor decision-making of leading bankers) is Johan Norberg’s .

    Certainly the idea that the crisis was entirely a market failure is not supported by the evidence. Equally it would be stupid to deny that financial markets have some inherent instabilities, and that there will always have to be an element of state support for banks, if only to protect depositors and so prevent bank runs.


  2. Niklas Smith Says:

    Sorry, the link didn’t work. The book is called Financial Fiasco and is on Amazon here: http://www.amazon.co.uk/Financial-Fiasco-Americas-Infatuation-Ownership/dp/1935308130/

    Unfortunately the UK distributors ran out so it’s not available again until the end of February.


  3. Norman Fraser Says:

    Aye, and the Tooth Fairy also had a hand in it!


  4. Tom Papworth Says:

    Indeed. The financial markets are seriously flawed, not least because the moral hazard created by implicit (and now explicit) government guarantees has made risky casino banking possible.

    I sometimes see the banking sector as like the narcotics sector: the government provides the drug in the form of low interest rates, a lender of last resort function and potential bailouts; the bankers therefore get loaded and create massive problems for the rest of society.

    What is so sad is how some people – notably those who are already of a socialistic and statist mindset – simply refuse to see that the Government can have had a hand in it too. It’s all the fault of greedy capitialists, even though it is not capitalists who have created the system of massive credit expansion that makes boom-and-bust possible.

    Incidentally, among the economists that Fergusson highlights is Hayek, who argued exactly this, and suggested that we should do away with any state support for the banking sector and any central bank role, instead allowing banks to compete in the provision of currency, and so give them an inherent motive for ensuring that the currency they provide was sound.


  5. Stephen MacLean Says:

    Dr Ferguson disproves wonderfully the assumption that underlies one of the more well-known lines from Lord Keynes’s The General Theory of Employment, Interest, and Money:

    ‘Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.’

    The assumption is that—at least by many political economists, and granting the slow uptake of cutting-edge economic theorising—that new ideas are necessarily an improvement upon the old.

    But this is an assumption that Ferguson implicitly denies, and one that Murray Rothbard popularised in his writings that demonstrated that oftentimes it is the long-dead economists who had a better grasp of the fundamentals than their successors. Ferguson is right: much is due to the economic historian who, if nothing else, dusts off forgotten truths and restores them to economic prominence.


  6. Steve Says:

    I think Minsky comes out of this best.


  7. Niklas Smith Says:

    @Steve: Yes, Minsky is very interesting. He develops Keynes’ most penetrating insight – that there is irreducible uncertainty (Rumsfeld’s “unknown unknowns”!) that we cannot predict with a probability distribution. This short paper by Minsky is a good introduction to his thinking: http://www.levy.org/pubs/wp74.pdf


  8. Tom Papworth Says:

    Ohhh. “Short paper”. Two of my favourite words!


  9. black hat world Says:

    I love when you talk about this type of stuff in your posts. Perhaps could you continue this?


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